Fed’s Tarullo details plans to counter bank runs

Global regulators need more policy tools to counter the risk of devastating bank runs and should have powers over a wide array of market participants, U.S. Federal Reserve Governor Dan Tarullo said on Friday.

“There is a need to supplement prudential bank regulation with a third set of policy options in the form of regulatory tools that can be applied on a market-wide basis,” Tarullo said at a conference on shadow banking.

He also detailed the Fed’s plans to write new rules that would make it less attractive for banks to raise cash in short-term wholesale funding markets, a key factor in the collapse of Lehman Brothers in 2008.

Banks that substantially rely on short-term funding in the interbank market should be required to hold more capital on top of what is already mandated by international rules under the so-called Basel III pact, Tarullo said.